How To Fund Your Business: 7 Ways To Get The Capital You Need In 2023
These fast and easily accessible alternative business funding lenders might be a better fit for your business than a traditional bank with high borrower requirements.
Figuring out how to fund your business can be one of the biggest roadblocks to getting a new venture off the ground. A great idea and a strong product are only as good as your ability to produce and market it. Unless you’re sitting on a fat stack of cash, there’s a good chance you’ll need to seek an outside source of funds.
Below, we’ll take a look at how to fund your business and some of the pros and cons to each strategy. Read on to find out more.
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How To Get Funding For Your Business: 7 Ways
There are a number of ways of going about how to fund your business, including business loans and business loan alternatives like grants and crowdfunding.
Business Loans
One of the most common ways to acquire funding is through a business loan. As the name implies, these are financial agreements designed specifically with businesses in mind. You’ll hear the term “working capital” frequently invoked with business loans, which means the loan can be used to finance a wide variety of day-to-day business expenses. Other types of business loans may have more specific uses, such as is the case with equipment financing.
Business loans come in a wide variety of forms, with differing qualifications, terms, rates, and borrowing amounts.
Lines Of Credit | Revolving credit lines that are used for quick access to cash for working capital or business expansion needs. Can be obtained from an online lender or a bank/credit union. |
Online Loans | Quick, convenient loans you can apply for online; these have easy-to-meet borrower qualifications but usually charge higher borrowing fees than a traditional bank loan. |
Term Loans | A traditional loan (also called an “installment loan”) that is repaid over a set period, with a fixed or variable interest rate. Can be a bank loan or an online loan. |
Short-Term Loans | Online term loan with a short repayment schedule — typically 3-12 months — and easy-to-meet borrower qualifications. May charge high fees, usually in the form of a factor rate. |
Merchant Cash Advances | MCAs are an advance on your business’s future earnings, which you repay as a percentage of your daily sales. Typically has a fixed fee structure, which can be very expensive. |
Microloans | A small business loan (typically ranging from a few hundred to a few thousand dollars) typically offered by nonprofit lenders at a low-interest rate. |
SBA Loans | These are US Small Business Administration-backed bank loans. These are high-quality loans with low-interest rates but can be difficult to qualify for. |
Equipment Financing | A way to finance major equipment purchases, including loans and leases that usually don’t require good credit or collateral. |
Business Loan Alternatives
As versatile as business loans are, they tend to have one big sticking point: you generally have to have been in business for a while before a lender will offer you a business loan. How long can range from 6 months for some of the more risk-friendly alternative lenders to 2 years for banks or more conservative alternative lenders. This puts entrepreneurs who are just launching their businesses in a Catch-22.
Luckily, there are a number of ways around this problem. Read on.
Personal Loans
If you haven’t been in business long–or have yet to start–you may find it difficult to get a business loan. After all, lenders have no idea whether you can run a profitable company. However, if you have a good personal credit history, you may be able to get a personal loan for business. This can also be a viable strategy if your personal credit history looks better than that of your business.
Personal loans that can be used for business often have longer repayment terms than an equivalent business loan but also lower borrowing amounts. This makes them generally better suited for launching a small-scale business than one that requires a large capital infusion to get started.
Business Grants
What if you could get a cash infusion and not have to pay it back?
Small business grants are awards, generally cash but not always, given to companies that meet a specific set of qualifications. These can range from being in a particular area to being in a particular industry, to addressing a particular problem, to having a particular background. While grants do not have to be repaid, just be aware that applying for a grant can be a very competitive and time-consuming process.
Crowdfunding
Another way to get funding for your small business is through crowdfunding. By running a successful crowdfunding campaign, an entrepreneur can fund their business through microdonations. This process doesn’t involve acquiring any debt, but you may have to offer awards or equity in your company to your donors. Additionally, there is often a fee for using the platform. Finally, be aware that some platforms will require you to meet your campaign goals to receive funding.
Invoice Factoring
Invoice factoring is financing that frees up cash from outstanding invoices. Here’s how it works: The invoice factoring company, or “factor,” will purchase your unpaid invoice and typically front you 85-95% of the value of the invoice. The factor then collects payment from your customer and sends you the remaining amount of the invoice, minus a 1-5% factoring fee. Your factoring fee is determined, in part, by how long it takes your customer to pay.
As you might expect, invoice factoring is appropriate for businesses that frequently have unpaid invoices and have cash flow problems as a result. Bad credit isn’t typically a concern, as factors are more concerned with your customer’s ability to pay, not your business’s. As such, startups and newer businesses are eligible for this alternative financing option so long as they have unpaid invoices to sell.
Invoice Financing
The two terms sound alike, but invoice financing is not the same as invoice factoring. With invoice financing, the financing company grants you a line of credit, using your unpaid invoices as collateral. The size of the line of credit depends on the dollar amount of your outstanding invoices. The financing company does not actually purchase the invoices, so it is still your responsibility to collect from your customers. (Remember that you sell your invoices for immediate cash with invoice factoring, and it becomes the factoring company’s job to collect payments on those invoices.)
Invoice financing is a smart solution for businesses with unpaid invoices that don’t necessarily need immediate cash or have a problem with a third-party collecting from their customers. Invoice financing also typically has lower fees than invoice factoring.
Credit Cards
Business credit cards can also be a source of funding. Credit cards function like short-term, high-interest revolving lines of credit that can be conveniently used at point of sale. Additionally, many credit cards offer reward programs that can actually save you money if used wisely.
However, approach using credit cards with caution. Because they carry high interest rates, credit cards should not be used for expenses that can’t be paid off within their monthly interest-free grace period.
Do I Need To Get Funding For A Business?
Before you go into debt, commit to a crowdfunding campaign, or start a grant application, you should ask yourself: do I really need an external source of funding to get my business off the ground? Bootstrapping your startup keeps other people’s fingers off of your business. And established businesses can sometimes eliminate wasteful costs.
Ask yourself these questions:
- Can I handle the work required of my business on my own?
- Can I start my business without quitting my day job?
- Can I deliver my product or service without a physical retail location?
- Can I squeeze a few more months or years out of my existing equipment?
- Can I eliminate products or services that are losing money?
- Can I reduce costs without sacrificing quality?
- Can I minimize overhead by using free or pay-as-you-go services?
- If I do need help, can I get a partner to share in the sweat equity?
Every “yes” can reduce your reliance on business funding. If you’re ready to look for a loan, however, check out our picks for best small business loans.